Mortgage and Portfolio Loan Guide

Do I qualify for a home loan?

Here are all the answers to the question “Do I qualify for a home loan?” The answer to that question is really a four part question regarding you income, credit, assets, and property.

The real questions to be asking are:

  • Does my income qualify me for a mortgage?
  • Does my credit meet mortgage requirements?
  • Are my assets enough to cover the required down payment, closing costs, escrows, and reserves?
  • Does the property I am looking to buy meet lender guidelines and requirements?

In this post I will cover the answers to all of those questions and more. You’ll know exactly what you’re up against when seeking mortgage approval.

Does my income qualify for a home loan?

When applying for a mortgage you have to think like an underwriter.

Regarding income, here is how an underwriter thinks: “does this potential borrower show consistency and stability with their income and employment history?”

In the mortgage world consistency is best demonstrated by providing proof of income for the most recent two year history. If your income is the same or more this year than it was last year, and the year before – that means your income is consistently increasing.

If your income is less last year than it was the year before, that means your income is “declining”. Declining income demonstrates instability, and could potentially cause an issue with approval unless there is a legitimate reason for the declining income.

If showing declining income it helps to show that you’re back on your feet by showing your year to date income is back on track to earn what you did in previous years.

W-2 employee of a company your income will be based on the gross amount on your pay stub. When you are a salary employee it’s very simple.do I qualify for a home loan income

If you are an hourly employee your income is: your wage X average hours per week X 52 / 12.

If you recently received a raise, your income will be based on your most recent raise.

For incentive pay like commission, bonus, overtime – you will need a 2 year history of receiving that income in order to be able to demonstrate consistency/stability.

What if you are self-employed?

See full article on how your income is considered.

The way the lender decides if you’re eligible for a loan is by calculating your income and measuring that against your monthly liabilities (including all items shown on credit, alimony/child support, and all real estate obligations). The underwriter divides your debt into your income (or debt to income ratio).

So if your debt is 4,000/month and your income is 8,000/month, you have a 50% debt-to-income (DTI) ratio.

Most lenders to not like to see debt-to-income ratio above 45%, but in some cases 50% DTI is accepted with strong compensating factors (high asset reserves, low loan to value ratio, etc.).

Does my credit meet mortgage requirements?

Credit = credibility of previous payment history.

You have 1 score from each bureau:

  • Transunion
  • Equifax
  • Experian

For a standard conventional loan, 620 middle credit score is needed. [For other loan types, there are cases where you can go as low as 500 credit score. Just ask.

So if you have scores of 650, 675, 690 – the 675 score is what is used.

Important Note: The scores that the credit bureaus report to mortgage lenders are different than what is reported to consumers who pull consumer reports. The scores that lenders see are almost always lower than what you might pull on CreditKarma.com.

CreditKarma.com is still a great site, and gives you something to start with when trying to get an idea of where you stand.

Aside from actual credit score, here are the things lenders look for on your credit report:

  • On time payment history (or lack thereof – aka late payments)
  • Length of credit established
  • Derogatory marks like collections, charge-offs, judgments, tax liens
  • Major credit events like bankruptcy, foreclosure, short sale

Payment History

It’s crucial to be able to show minimal late payments in the most recent 24 months, especially on housing payment history. Most traditional loans only allow one 30 day late payment in the last 12 months.

But there are alternative loan options for unique credit circumstances.

Length of Established Credit

In many cases there will be a need to show at least 12 months of established credit. However, there are exceptions.

If you have 10-20% down payment, >2 years on the job, and can prove rent history, it may be possible to get approved with less than 12 months credit history.

No Credit Score | No credit Historydo i qualify for a home loan credit

Some people just like to pay cash. Plain and simple. I get it.

For those who have no credit established, and no credit score, you may still qualify for a mortgage by using non-traditional credit approach.

A non-traditional credit report would consist of 3 accounts you pay toward that do NOT show on your traditional credit report.

Examples of non-traditional credit:

  • Rental payments
  • Utility payments (gas, electric, water, landline, home phone, cable)
  • Netflix/HULU
  • Child care
  • School tuition
  • Proof of 12 months savings
  • Gym membership
  • And more

If you have a legitimate (and consistent) 12 month payment history on an account there is a chance it may be considered by the lender in the overall decision to lend.

Derogatory Marks

For minor collections, there are cases where they do not need to be paid off prior to closing on your home loan. Medical collections are given some flexibility as well.

But if you have more than $1,000 in outstanding collections, they will most likely need to be paid prior to closing.

Judgments and tax liens must be paid prior to closing. The lender does not want to have to deal with those obligations potentially becoming a lien on the property/collateral.

These derogatory marks do not necessarily need to be removed from the credit report. Most of the time, the lender just wants legitimate proof or paper trail to confirm the obligation has been paid/satisfied/settled.

Disputed Accounts

When you dispute an account on your credit report because you disagree with the way it is being reported, the credit bureaus immediately disregard that account when calculating your scores.

The result of disputing an account is the credit scores go up. This is because the negative account that is being disputed is not being included in the overall scoring calculation.

For that reason, lenders will typically not allow a loan to proceed until the dispute has been removed, and new credit has been pulled. The logic is: if there is a disputed account, the credit scores are artificially high.

Major Credit Events

On most mortgage loans there is a waiting period between when a person has gone through a major credit event, and when they are eligible for new home financing. Below is a basic summary of what to typically expect as far as waiting periods are concerned. [there are portfolio loans where no waiting period is required]

  • Bankruptcy – Chapter 7
    • FHA – 2 year waiting period
    • Conventional – 4 year waiting period
    • VA – 2 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment if home was included in foreclosure.
  • Bankruptcy – Chapter 13
    • FHA – Must have 12 months on time payments and permission from trustee to enter new mortgage. Must be manually underwritten if less than 2 years.
    • Conventional – 2 year waiting period
    • VA – 1 year waiting period
    • USDA – 1 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment
  • Foreclosure
    • FHA – 3 year waiting period
    • Conventional – 7 year waiting period (Unless property that foreclosed was included in bankruptcy. If home was included in BK, waiting period is based on bankruptcy discharge date)
    • VA – 3 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment
  • Short Sale or Deed-in-lieu
    • FHA – 3 year waiting period
    • Conventional – 4 year waiting period
    • VA – 3 year waiting period
    • USDA – 3 year waiting period
    • Portfolio Loan – No waiting period with 20% down payment

Keep in mind, guidelines change constantly. It would appear a portfolio loan is a good option if you’re back on your feet and don’t yet meet traditional waiting period requirements. More on portfolio loans here.

Do my assets meet home loan requirements?

When evaluating assets the underwriter is reviewing available funds for:

  • Down payment – The amount that you’re coming out of pocket to secure the home.
  • Closing costs – The fees associated with acquiring the home (appraisal, origination, title, closing, recording, etc.)
  • Escrows/prepaids (for taxes and insurance) – The amount set aside to account for taxes and insurance on the property
  • Reserves – The amount of left over available funds

The funds used to qualify must be “seasoned” in your account for 60 days to be eligible funds. Any large deposits that are not seasoned must be explained and sourced. Cash deposits are unacceptable because the source cannot be verified/confirmed.

If you have a property that you are simultaneously selling during the process of buying the new home, the proceeds of the sale of that previous home do not need to be seasoned. You will need to provide proof of sale of the home (purchase and sale agreement) as well as the closing statement prior to closing on the new home.

Reservesdo i qualify for a home loan assets

The logic of reviewing reserves is: if the borrower should unexpectedly fall on hard times, there is enough set aside to cover the mortgage payment for X number of months.

Showing adequate reserves helps strengthen the overall file.

Reserves can be from your traditional bank account, brokerage account, retirement account, etc. You cannot use a non-borrower’s account to show reserves.

Gift Funds 

For most loan types gift funds from family are acceptable. There are scenarios where a non-family member can gift the funds, but every lender is going to have a different interpretation of who is acceptable. For best results, just ask.

Non-Liquid Assets

Cars, RV’s, heavy equipment, beanie babies… are not liquid assets.

Vehicles and other items that can be easily valued, can be considered if sold and properly documented.

If you sell a car in order to qualify for a mortgage be sure to have kelly blue book value on hand, bill of sale, and copy of the check you received when you sold the vehicle. Having a full paper trail helps tremendously.

 

Does the property being financed meet lending guidelines?

There are an infinite number of reasons the property might not meet lender requirements.

I am going to cover some of the most common reasons the property can be the cause of denial with the lender.

Non-Warrantable Condo

When buying a condominium, not only does the borrower’s finances get evaluated, but the homeowners association is also closely reviewed.

The lender will order a “condo questionnaire” in order to evaluate the health of the association.

They’ll look for things like: completion status, investor concentration, pending litigation, and so much more.

More on non-warrantable condos here.

Repairs Neededdo i qualify for a home loan house

If the property is in disrepair, the lender will require completion of repairs prior to closing in most cases. Repairs needed will be determined based on appraiser’s comments in the appraisal report.

The repairs need to be completed by the seller, and a final inspection will be needed prior to closing to confirm completion.

If your repairs are fairly minor, there are many lenders that will allow a “repair escrow”.

A repair escrow is where funds are set aside at closing to cover the cost of the repairs needed. Then the loan closes, and repairs are done after closing. A final inspection is completed when ready.

Typically this only allowed when repairs are no more than $5,000. With a repair escrow, 150% of the estimated repair costs are collected in case of unexpected cost overages.

Example: if the repairs needed are estimated to be $3,000, the actual amount collected for the repair escrow will be $4,500.

If the excess funds aren’t used, the difference will be refunded to the borrower or applied toward the principal balance.

For properties in need of major repair. There are renovation mortgages available on both FHA and conventional.

Unique Property Type

One of the most crucial parts of the appraisal report has to do with the appraiser being able to find recently sold homes that are comparable in size/condition/use that have sold within a reasonable distance.

If there are unique features to the property, the appraiser may have a challenge that cannot be resolved due to market conditions.

Even if there are comparables, some lenders simply do not allow unique property types.

Unique features that could be a challenge:

  • Berm homes
  • Properties that are not suitable for year round occupancy regardless of location
  • Agricultural zoned property
  • Condo hotels
  • More than 20 acres
  • Hobby farms
  • Leaseholds
  • Rustic log cabins
  • Working farms, ranches, or orchards

For unique property type financing, a portfolio loan may be a solution.

In Summary

There are four major pieces of the scenario to consider when asking the question “do I qualify for a home loan”?

Those pieces are: income, credit, assets, and property.

If any of your questions were left unanswered I strongly encourage you to reach out to me below and ask.

If I cannot help, I should be able to point you in the right direction at the very least.

self employed home loans

 

 

E001: How to Build Credit to Buy a House

E001: How to Build Credit to Buy a House

 
 
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Episode 1 of the Mortgage Guide podcast. Building credit is crucial when seeking home financing. Here are some tips to carry with you.

Original video here: https://youtu.be/oqgEkE_zYQE

Full article here: https://www.balanceprocess.com/credit/

More on portfolio lending: https://www.balanceprocess.com/what-is-a-portfolio-loan/

4 Things to Stop Doing as Soon as You’re Pre-Approved

Isn’t it fun getting a mortgage pre-approval?

You get your credit pulled by the nice guy in a tie at the bank. You tell him about all the glorious money you have to put down on your home. You drink coffee and explain how you make a clean salary, and you hardly ever use your credit cards…

Of course he is happy to print off your crisp, clean pre-approval letter. He connects you with the local real estate genius, and the house hunting begins.

All of the sudden your dog gets sick and you have to pay $900 to keep it alive. “Well sorry ole’ Sparky but I can’t dip into the family savings, let’s use the AMEX to keep the ticker ticking.”

A week later you finally sell your BMX racing bike on craigslist and you’re feeling good with a nice $1,500 deposit into the rainy day fund.

Jimmy from high school gives you a ring and asks you to be a partner in his new business venture, and you accept the offer. C’mon, YOLO.

There was a sweet deal going on at Buy Here, Pay Here, and you finally got the Bronco 4×4 you’ve always wanted.

Uh oh, why is my mortgage guy asking for a paper trail for this stuff? Any why has my credit score tanked? This new business is gonna kill it. What, do they want a blood sample too?

  • Don’t use your credit cards past 30% of you available balance. It’ll change your scores in a way you and your lender won’t like. Sometimes (depending on how long it takes to find a house) your credit may need to be pulled again.
  • No large deposits in your bank account that can’t be easily sourced. (anything other than salary income). Large deposits raise red flags and need to be sourced. What the lender wants to know: “where did it come from?”  “do you have mysterious liabilities we don’t know about that you’re paying back?”
  • Don’t change jobs. Can that wait while you make one of the biggest investments of your life? Consistent income helps strengthen the likelihood of your file being approved.
  • Stop buying stuff. When your lender pulls your credit they are taking into account all of your liabilities, and taking into account what your income is in order to calculate what you’re approved for. If your liabilities increase, there is a chance your pre-approval will decrease. Make sure to ask how tight your ratios are.

Remember, the lender is on your side (believe it or not). We WANT to earn your business. But if you decide to change your financial circumstances after you get pre-approved for a mortgage, just understand that there is going to be some leg work involved to put the pieces of the puzzle together.


E005: 4 Things to STOP After Pre Approval

How to Get Pre-Approved to Buy a House with Ease!


 

How to Build Credit to Buy a House

Prepping Your Credit for a Mortgage

When you’re finally ready to become a homeowner; it is certainly an exciting and anxious time! The last thing anyone wants to do is find out last minute that there is a blemish on their credit report that cannot be resolved quickly enough to close on your dream home in time. In Part 1 of the “keeping your home loan process simple” series we looked at all the basics of the puzzle on a mortgage approval. In this portion we’ll look at the credit piece in detail order to keep potential home buyers in the loop on what to be ready for.

Your credit report is your opportunity to show your credibility to your lender. It serves as a reference of the liabilities you have paid in the past and present.

Your credit report is heavily considered with your approval because it gives an indication as to how you treat the responsibility of paying items you’re liable for. If you have 0 previous derogatory marks, and you have 3-4 tradelines that you have been paying on time for 24 months; your credit should be in good shape. There is no question that everyone’s situation is unique in many ways.

 

Understanding how information on your credit is evaluated can “make you” or “break you”. If you can anticipate issues that you may encounter; you’re really putting yourself a step ahead of the game. Below are a few explanations of common terms to help decipher what a credit report shows. 

Score

There are loan programs available that allow you to buy a home with a credit score below 640. However, the objective is simplicity. So with that in mind; a good goal would be to make an effort to be at 680 or higher as a middle score (as reported by Experian, Equifax, and Transunion). Anything 740 and higher is considered excellent.

History

The history on your credit report is just as important of a factor as your credit score. Anything derogatory in the last 10 years is likely to be available to the eyes of the lender.

Tradeline

Any recurring debt that is reported by the credit bureaus on your credit report is a tradeline. Examples include but are not portfolio loan past credit issueslimited to car loan, student loan, personal loan (from bank), home loan, and recreational vehicle loan. Rent payments (although important to keep record of and pay on time) and utility bills are examples of liabilities that are typically not reported on credit reports.

Debt-to-income Ratio

Your lender will use your credit report as a starting point to help determine what your debt to income ratio is. Your lender will take into account the liabilities that show on your credit report, and compare that with how much your verifiable monthly income is. Of course your new mortgage, property taxes, property insurance, and mortgage insurance (if applicable) will be factored into the equation. You certainly can expect  any child support, alimony, and 401k loans to be factored into your debt as well. 

Example: Mr. Homebuyer has 3 credit cards that total 100/month, a mortgage of 900/month (including taxes and insurance), and makes 4,000/month. Mr. Homebuyer’s debt to income ratio is .25 (or 25%). Debt / Income = Debt to income ratio. To keep things simple you want to aim to be below 43% debt to income ratio.

Derogatory Items

Derogatory items that show on your credit report will hurt your scores, and create challenges when getting a mortgage. Late payments, collections, tax liens, bankruptcies, foreclosures, short-sales, and repossessions are some examples of derogatory items that can be found on your credit report. The more recent those items have been reported; the more negatively your scores will be affected. Here are some of the most common issues and tips on how to address them.
 
  • Late payments. Any liability that is reported on your credit report showing a late payment of 30 days or more will have a negative impact on your scores. Upholding your end of the bargain (paying on time) is a significant part of establishing good credit. 
  • Collections. These can be a result of an unpaid cell phone bill or even a medical bill you forgot to pay. Really, almost anything that you agreed to pay for in any fashion can be sent to a collection agency if it remains unpaid. It’s in your bestDoes a Portfolio Loan make sense for you- (1) interest to get collections resolved as quickly as possible once you’re aware of them. In some cases collection agencies will accept less than what is owed in order to resolve the debt. However, paying the collection won’t necessarily improve your credit. To improve your scores after paying the collection; request a “letter of deletion” from the collection agency. Basically it’s a letter confirming the collection shown on your credit report has been paid in full, and will be deleted from your credit report. If you can convince the collection agency to do that then make sure you ask for a copy as well. You’ll want to send a copy of that to all 3 credit bureaus. Some collection agencies will do this; others won’t. It’s definitely worth a try. You may need to talk to a manager and get it escalated. If you have 1 or 2 medical collections that are only a few hundred dollars you don’t need to lose sleep over that. Medical collections are not treated as severely as regular collection (depending on the size of the medical collection).
  • Tax liens. If you have taxes that you owe the IRS they will issue a lien, and report that to the credit bureaus if they are not paid by the due date. The best thing to do is pay your taxes on time because if there is a lien outstanding; the IRS may start tacking on interest to the balance that is owed. Any tax liens outstanding will hinder your ability to obtain home financing until that has been paid in full. You’ll need to provide your lender with proof from the IRS that it’s paid in full and clear.
  • Bankruptcy. There are two most commonly used bankruptcy types that consumers use; chapter 7 and chapter 13. You would need to consult with an attorney to decide which is more fitting for your situation. Guidelines related to mortgage approval after bankruptcy are constantly changing. As a rule of thumb you want to be at least 3 years out from when the bankruptcy was discharged before looking to obtain financing. Immediately after the bankruptcy is discharged it’s best to make every effort to “reestablish” your credit. That involves getting a couple new tradelines in your name (credit card, personal loan, student loan…). Once you have shown a 24 month history of reestablished credit; you’re setting yourself up for success. 
  • Foreclosure and short-sale. Similar to bankruptcies; you’ll want to be at minimum of 3 years out from when the foreclosure or short-sale was closed. Again, guidelines are constantly changing on these items. Working on getting your credit reestablished as explained in the above bankruptcy explanation should be a high priority. Check here for changes on this.
  • Repossession. If you decide to “give your car back to the bank,” you can expect repercussions. Make sure that once it’s repossessed that there are no lingering debts affiliated with that. It’s a good idea to make sure all of your other liabilities are on time, and in good standing for 24 months prior to seeking home financing.
Guidelines and regulations are constantly changing.
President Obama’s recent state of the union address briefly touched on how that needs to be a priority. The fact is owning a home is generally a significant component in realizing the American Dream. Hopefully guidelines will loosen up a bit from the extreme government regulations that are currently mandated. In the mean time; use this information as a tool to set yourself apart from the average home buyer. With some preparation, you can get a mortgage for bad credit. 

A couple closing tips… 

Don’t overextend your credit limits.
If your credit cards are pushing their limits, then this can be a red flag for lenders. Try to keep your credit card account balances below 35% of your available credit limit. This may keep you from looking overextended.

Credit glossary word of the week: CHARGE-OFF

A debt that is declared by the creditor as being noncollectable. This means the lender considers the money it loaned to the borrower is lost. Lenders use this as a last resort, once all collection efforts have failed. A bankruptcy filing often results in several accounts becoming charged-off. Charge-off s usually lower credit ratings. Also known as bad debt, charged-off account, charged-off balance, charged to loss, charged to profit and loss.

 How to Build Your Credit to Buy a House

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E001: How to Build Credit to Buy a House

How to Get Pre-Approved with Ease

The 4 Pieces of the Mortgage Puzzle

Buying a home is easy. Well…if you take a minute to skim through this it might be a little easier for you on the qualifying end of things. Getting a mortgage is a matter of helping the lender put together the pieces of your financial puzzle. Many times it can get what feels like overly complicated in this world of increased government regulation and lending guidelines. But it can be a lot less complicated if you do a little preparation and have realistic expectations.

So what are the pieces of the mortgage puzzle? Credit, income, assets, and property. If one piece doesn’t fit, your puzzle isn’t complete and you probably won’t get approved. Let’s take a look at those items one piece at a time.

Credit 

Your credit scores and credit history are looked at thoroughly. Each score will be verified from the three credit bureaus (experian, transunion, and equifax). If you only have 2 scores that show up that’s okay, but your lower score of the two will be used to qualify. If you have 3 scores, ideally you want to have a middle score in the mid to high 700 range. Anything below 680 can make things more complicated than what you may be looking for. The other factor that your credit report helps with is determining your monthly debt in comparison to your monthly income (debt to income ratio).

Again, the goal is to keep things simple.

When considering the history shown on your report it’s best to have 3-4 established tradelines that you have been paying on for 24 or more months. A tradeline is any obligation you’re required to pay on a monthly basis that is reported to the credit bureaus. Things like credits cards, student loans (that are not deferred), car loans, personal bank loans, and simple mortgage approvalmortgages would be simple tradelines to verify and use. Cell phone bills or car insurance payments are an example of debts that are not typically on a credit report, and generally would not be used as traditional credit. For derogatory credit tips and more credit preparation see my credit page.

Income

Having a 2 year consecutive and verifiable income stream will help keep things simple for you. You want to have 2 year’s tax returns, W-2’s, and 30 day’s worth of recent pay stubs from your current employer. These items are asked for so that you have the opportunity to show stability and consistency in your income.

If you’re on a base salary or hourly (full time) that will definitely help minimize bumps in the road. Keep in mind that if you receive overtime, bonus, or commission pay it needs to be verifiable to show history and consistency. If you changed employers in the same line of work within the last 24 months, be prepared to provide proof of that employment. If you’re self employed or receive other types of income be prepared to show a consistent history (24 months) and likelihood to continue. For more in depth income tips see my income page.

Assets

There are many options when considering how much you should be putting down to buy your home. Everyone’s situation is unique. You’ll need funds for down payment, property taxes, homeowners insurance, and closing costs. Having at least 2 full months bank statements (all pages) would be something to expect to provide. If you have retirement funds or other liquid assets in a brokerage account that you’ll be using then you’ll need to provide a most recent quarterly statement, and recent activity statement on that account to show proof of funds available. You’ll need to show proof that you have transferred those funds to your bank account prior to closing.

Be prepared to provide a paper trail for everything. If there are any deposits in your accounts that you don’t have a legitimate paper trail for then you will find yourself in a difficult position as far as approval is concerned. Selling your favorite baseball card collection for cash to someone you met on craigslist might be tough to prove. For gift, grant, and other asset info see my assets page.

Property 

The home you are purchasing is the collateral that is being used to secure the financing. Your lender will get an appraisal done to get an opinion of what the fair market value is in relation to the agreed upon purchase price that you and the seller came to terms with. If the appraised value comes in high, congratulations! You technically have instant equity, but the lender will still use the purchase price as the value for qualifying purposes. If the appraisal comes in low you and the seller will need to renegotiate price or you’ll need to bring the difference to the table. The lender will also ask for any repairs noted by the appraiser to be fixed and re-inspected prior to closing. In most cases you’d insist that the current owner completes those howell mi real estaterepairs because you don’t own the home yet.
The lender doesn’t require a general inspection to be completed but it’s usually recommended. This would be a licensed inspector you would hire to tell you what you’re getting yourself into regarding condition. They will put together a detailed report including foundation issues, ventilation problems, and other things that the appraiser wouldn’t necessarily notate. For information on property types and helpful links see my property page.

 

Simple enough right? Look, even if you’re not a first time home buyer, it can be a bit overwhelming. The market and the guidelines are constantly changing. You will save yourself a lot of heartache and pain if you take the time to get your ducks in a row several months before you intend to buy.

A few tips to end with…

Your willingness to provide all items asked for by your lender in a timely manner is helpful to minimize the length of time it takes to close on the home.

Use a Realtor when buying or selling a home. He/she will save you time and money.

Remember that all the pieces to the puzzle have to fit. Even if you make $100k/year, buying a $50k home, and have no debt. You still need to have acceptable credit to obtain financing.

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